The grandfather slays Medusa

Have we abandoned the control test (in favor of the grandfather rule)  in determining the nationality of a Philippine corporation engaged in a partly nationalized activity?

Medusa by Caravaggio

It would appear so insofar as the General Counsel of the Securities and Exchange Commission (SEC) is concerned.  In SEC OGC Opinion No. 10-31 dated December 9, 2010 (which involves Australian mining company Medusa Mining Ltd), the SEC’s General Counsel ruled:

. . . we now opine that the control test must not be applied in determining if a corporation satisfies the Constitution’s requirements in certain areas of activities. . .  applying the control test effectively circumvents the Constitutional mandate that corporations engaging in certain activities must be 60% owned by Filipino citizens. . . Having established that the grandfather rule, instead of the control test, is the standard consistent with the provisions of the Constitutional (sic) and the Mining Act restricting foreign participation in a mineral production sharing agreement, we now apply the grandfather rule to the joint mining venture. . .

The abandonment of the control test in favor of the grandfather rule will have disastrous effects on existing and future foreign investments in the Philippines.    Over the past several decades, both the SEC and the Department of Justice (DOJ) have affirmed the use of the control test, which also finds statutory support in the Foreign Investments Act of 1991 and its implementing regulations.  Foreign investors and their Philippine partners have therefore structured their businesses in accordance with the control test.  A sudden change in policy will shake investor confidence in the Philippines.  Certainly, rules should not be changed in the middle of the game.

There is the question of whether the SEC’s General Counsel can, through the issuance of the opinion, abandon the control test.  Can the SEC’s General Counsel overturn prior opinions of the Department of Justice on the same issue?  If the SEC is minded to abandon the control test, shouldn’t that be formally declared by the SEC en banc?  In any event, the issue of the control test versus the grandfather rule will remain a raging issue until the Supreme Court issues a ruling on the matter.

(See the following blog posts for a discussion of the control test and the grandfather rule in determining the nationality of a corporation:  (1) How to Determine the Nationality of a Corporation;  and (2)  How to Determine the Nationality of a Corporation (Part 2). )

(Photo: Medusa by Caravaggio is a file from Wikimedia Commons)


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